Unexpected GDP Growth, But Tax Contribution Should Not Be Omitted: Experts

The Indian economy grew at an impressive rate of 8.4 per cent in Q3FY24, surpassing economists' expectations of 6.6 per cent growth. However, it is important to interpret the headline growth figure with caution as there are other factors at play, experts suggested.

The GDP figures for the first and second quarters of the ongoing financial year have been revised to 8.2 per cent and 8.1 per cent each, up from 7.8 per cent and 7.6 per cent, respectively.

According to Mospi's second advance estimate, the Indian economy is expected to grow at 7.6 per cent in FY24, which is higher than the previous estimate of 7.3 per cent. The Ministry of Statistics and Programme Implementation (Mospi) has released numbers that show a 10-year high divergence that economists see as contradictory.

Apart from the Gross Domestic Product (GDP), Gross Value Added (GVA) is another important factor that helps gauge the performance of a country's economy. GVA helps calculate the performance from the supply side of things. To put it simply, GVA is GDP excluding indirect taxes and subsidies.

“The GDP growth for the Q3 FY23 came in at 8.4 per cent, much higher than India Ratings and Research's (Ind-Ra) projection of 6.46 per cent. GDP growth of Q3 FY23 has been revised downwards to 4.3 per cent as against earlier 4.5 per cent. Besides, this downward revision, the other factor that seems to have contributed to the Q3 FY24 GDP growth is the non-pass through of lower input cost by the industrial sector as despite modest volume growth much higher value-added growth has been recorded in the industrial sector. This volume and value-added disconnect of the industrial sector is also playing out in the higher wedge between GVA and GDP growth as the difference between the two is net taxes. Non-pass-through of lower input costs has resulted in higher corporate profitability and higher payment of taxes,” said Sunil Kumar Sinha, Senior Director and Principal Economist, India Ratings and Research.

India's Gross Value Added (GVA) growth rate in Q3 FY24 was 6.5 per cent, which was in line with economists' expectations. However, this figure is lower than the 8.2 per cent growth rate in Q1 FY24 and 7.7 per cent in Q2 FY24. The net taxes in Q3 FY24 increased by 32 per cent as compared to Q3 FY23.

This has led to a widening gap of around 190 bps between GDP and GVA in this quarter. Experts attribute this divergence to the significant increase in net indirect tax growth. While Indian industries have shown growth, the economic growth has been uneven. The manufacturing and construction sectors have grown by 11.6 per cent YoY and 9.5 per cent YoY respectively, reflecting the public capex support push in the December quarter.

“The most encouraging number came from manufacturing which grew by 11.6 per cent YoY in Q3 FY24. Amongst other segments of the industrial sector, construction grew by 9.5 per cent YoY, followed by electricity or utility services at 9.0 per cent YoY in Q3 FY24. Services, the largest component of GDP, picked pace and grew by 7.0 per cent YoY in Q3 FY24, up from 6.0  per cent YoY in Q2 FY24. Some of its segments, which due to contact intensive nature recovered late, but have shown resilience lately. Its largest component trade, hotels, transport and communication grew at 6.7 per cent YoY in Q3 FY24. The other two components namely financial, real estate and professional services and public administration clocked a growth of 7.0 per cent YoY and 7.5 per cent YoY respectively in Q3 FY24,” said Paras Jasrai, Senior Analyst, India Ratings and Research.

Economists predict that the divergence between India's industrial and service sectors will normalise in the next few quarters. The Trade, Hotel, Transport and Communication segments, along with Financial, Real Estate and Professional Services have also shown signs of recovery.

However, private consumption growth in India remains sluggish, having only grown by 3.5 per cent in Q3 FY24. Interestingly, government spending took a sharp decline in Q3 FY24, contracting by 3.2 per cent compared to 13.8 per cent growth in Q2 FY24. Gross Fixed Capital Formation (GFCF) remained the driving force behind growth, rising by 10.6 per cent in Q3 FY24, compared to 11.6 per cent in Q2 FY24. Unfortunately, due to a disappointing monsoon season, agriculture GVA growth contracted by 0.8 per cent in Q3, down from 1.6 per cent in Q2.

“Private final consumption expenditure growth inched up but remained tepid at 3.5 per cent in Q3 FY24, with rural demand perceived to be cautious after an unfavourable monsoon and urban demand assessed to be uneven as well. Investments emerged as the fastest growing component of GDP in Q3 FY24 and displayed a mild sequential dip, contrary to the sharp slowdown seen in government capex. Amidst the sharp upside surprise in the headline GDP growth number, the contraction in the GoI's revex and capex, as well as the slide in the core sector growth in January 2024, offer some sobering trends,” said Aditi Nayar, Chief Economist, Head Research and Outreach, Icra.